ETFs Changing How Bond Markets Trade: iShares’ Wiedman

By Brendan Conway

Mark Wiedman, managing director, global head of iShares at BlackRock (BLK), tells listeners at a conference this morning that exchange-traded funds are stepping into parts of the bond market that have been vacated by large investment banks and are changing the way that those markets behave.

It’s a familiar theme for readers of the Barron’s ETF Focus column, which noted in September a study finding that indexed bonds tend to rise faster and fall harder than those outside the index — suggesting a pricing effect exerted by ETFs and index funds. The other effect: ETFs immediately become the most transparent pricing vehicle in a given corner of the bond market. Find a way to see what the market thinks an asset is worth more clearly, and it’s bound to affect how a trader behaves.

ETFs hold just 0.3% of the bond market today, versus an estimated 2.2% for stocks, Wiedman said at Index Universe’s Inside ETFs conference Monday. But the difference is likely to narrow, he argued, in part because bond-market bid-ask spreads have widened since major dealers and banks have stepped back after shrinking their balance sheets. This is a unique time for [ETFs'] growth,” Wiedman said. “Buyers and sellers need a place to be.”

“The next 5 to 10 years will [bring a] true transformation in fixed income ETFs, changing the way fixed income markets themselves operate,” Wiedman said.

About Focus on Funds

As exchange-traded funds and other investing vehicles have ballooned in number, the task of figuring out what works well and what doesn’t has only gotten harder. Barrons.com’s Focus on Funds looks under the hood of ETFs, mutual funds and hedge funds for overlooked values, actionable ideas and the latest pitfalls for fund investors.